The article below is written by Erick Haag on March 29, 2012
How to win the ongoing battle for compliance?
Procurement organizations today understand the importance of a seamless source to payment (‘S2P’) process. This process governs how an organization fulfills its day to day needs from suppliers, supported by easy-to-use requisition/ordering systems, approval workflows and reimbursement systems. It ‘closes the procurement loop’ as it enhances compliance to procurement contracts and is the key enabler of spend control and transparency. Supplier invoices can be approved for payment automatically when they match against the order quantity and price, and often also against the receipt of goods. This enables an efficient process with maximum spend transparency for the organization.
But why do so many organizations struggle with getting their S2P process right? From our experience with many S2P implementations, we see three root causes for why organizations miss out on closing the procurement loop.
The first challenge exists within the procurement function itself and relates to the alignment between sourcing and operational procurement. Category managers have to extend the scope of sourcing strategies beyond the supplier selection phase. They need to point out the appropriate requisition and ordering channel for their categories that maximizes contract compliance, for example by ordering through an electronic catalog or via a procurement card. It is also important to define the responsibilities between the operational teams and category management teams for operational sourcing, i.e. sourcing initiated by requisitions which do not have a contract or catalog reference. With many procurement organizations focusing category management performance metrics primarily on ‘contracted savings’, it can be challenging to get attention from category managers for the ordering process. To support this alignment, Capgemini Consulting offers a pragmatic S2P Channel Strategy approach, supported by the ‘S2P channelizer’ tool which facilitates the channel definition and category allocation process.
A second challenge in getting the S2P process right comes from the coordination between Procurement and Finance. Invoice processing is an important step in the S2P process, but it is usually the responsibility of an Accounts Payable team within the Finance department. Conflicting goals between Accounts Payable and Operational Procurement can lead to process disconnects, which usually lie in one of the following areas:
- Operational responsibilities, for example in the resolution of invoice mismatches and the communication with suppliers
- Policy adherence, for example in alignment on which suppliers are allowed to send invoices without a purchase order
- Master data management, for example in how new suppliers are approved and set up in the system
A well running S2P process can ultimately improve the efficiency in Accounts Payable by up to 60%. Capgemini Consulting has developed a configurable business case model which points out the costs and benefits of a channeled S2P strategy for all functions involved in the S2P process.
The third challenge in making S2P successful is driving compliance on an agreed upon S2P process across operational functions. When everybody uses the predefined requisition and ordering channels, the utilization of purchasing agreements is maximized and benefits are realized as planned. But since many people dealing with suppliers develop their own way of working, the transformation to using approved ordering channels requires behavioral change in many disciplines. From experience, we have learned that there are four key principles to maximizing process compliance:
- Make it easy: processes and systems should be as simple and user friendly as possible. Sometimes this requires a trade-off between control and ease-of-use, for example by running low value purchases through a P-card process with approval after the fact. Regular and multi-level communication is crucial. Users should be notified when new contracts or catalogs are available
- Provide continuous support: all users should be supported with education and training, but also with answers to day to day questions about process and systems (“how does this work?”) and about policies and governance (“who is responsible for this?”). This support is often provided by an S2P helpdesk with second line support from IT and Procurement
- Set targets for business functions: compliance is a responsibility of the business, and therefore KPIs on compliance should be defined and managed through regular business lines. Not procurement, but business managers are responsible for their teams’ compliance to agreed procurement policies and process. A notable example is one of our global clients where all people managers are evaluated annually on their targets to limit the bypass of procurement agreements
- Use carrot and stick: taking compliance management seriously means that consequences should be attached to compliance performance. It must be clear for all users what non-compliance will mean for them but also how good performance will be rewarded. As an example, a global provider of IT services rewards selected employees who make 100% of their targets with an incentive trip. The same company reports that employees who break procurement policies three times are seriously at risk for termination
Realizing process compliance requires continuous monitoring of the S2P process to focus the efforts in each of the four areas mentioned above. Capgemini Consulting uses a process mining tool to analyse the S2P process and propose improvement actions. It analyses bottlenecks and provides insight in operational performance data such as lead times and wait times. It also analyses the actors and their behaviors. Process mining applies Automated Business Process Discovery (ABPD) technology to build new process definitions and models from unstructured process data. This leads to real time insight into the overall performance of the source to pay process and continuous improvement by focused actions to improve process compliance.